South Korea seeks to boost orders by expanding refund guarantees to small and medium shipbuilders
To ensure the shipbuilding boom, supported by the US’s planned tough regulations on China and US-South Korea shipbuilding co-operation, is linked to order intake the government plans to support small- and medium-sized shipbuilders that have shown remarkable financial performances in 2024
The expansion of special guarantees, the diversification of RG issuers and the increase in the timely supply of RGs, reflecting improved financial performances, will be provided
THE South Korean government plans to revise the refund guarantee system for small- and medium-sized shipbuilders, as the financial structure of these companies has improved.
The move was made so as not to lose the opportunity to win contracts followed by the delayed issuance of guarantees because current financial statements that do not reflect the future value potential.
The government predicts that the domestic shipbuilding industry will be in good shape for some time due to the continuing global shipbuilding boom, competitiveness in building environmentally friendly and high value-added ships, the US plan to impose port fees on China-related ships and the possible revitalisation of South Korea-US shipbuilding co-operation.
The government said: “The issuance of RGs has increased compared to the past, but there is still a shortage compared to the industry's increasing demand due to the upturn in shipbuilding.
“Although the issuance of RGs to large shipbuilders has gone smoothly due to their favourable financial structures, the rapid expansion of RG issuance to medium-sized shipbuilders faces difficulties because the evaluation system is based on their past financial performance.”
Given the situation, the revised RG issuance system will be followed as follows.
The first is to accelerate the issuance of RGs within the remaining limit of the Korea Trade Insurance Corp (K-Sure)’s special guarantee of Won175.5bn ($120m) for small and medium-sized shipbuilders in the first half of the year. The total remaining limit was set at Won600bn, but Won424.5bn has already been issued.
The special guarantee is a dual guarantee by K-Sure to share the risk of issuing RGs to small- and medium-sized shipbuilders to ease the burden on financial institutions.
In addition, the current government contribution of Won120bn will be significantly increased to raise the special guarantee limit in view of the recent demand for shipbuilding orders.
Second, the issuers of RGs will be diversified to include the Export-Import Bank of Korea and commercial banks. Previously, only Korea Development Bank issued RGs to medium-sized shipbuilders. However, when demand for RGs surged in 2024, eight commercial banks and Industrial Bank of Korea issued additional RGs worth $260m to the companies as KDB’s RG limit of $1.3bn was exhausted.
Third, consultations with KDB and commercial banks will be promoted to issue additional RGs to medium-sized shipbuilders to reflect the improvement in their financial structure.
In addition, the government will support a more flexible issuance of RGs based on future value, where winning a promising project is expected to improve the financial structure.
The government said: “Medium-sized shipbuilders said that although they had won contracts with high future value, the issuance of RGs had been limited because the judging criteria were based on company credit ratings backed by current financial statements.”
With regard to RG issuers, guidelines will be developed for winning orders from medium-sized shipbuilders. The guidelines will include project feasibility, liquidity assurance plan and advance payment management plan.
In the absence of intent or gross negligence, and if the guidelines are followed, RG issuers will be immune from future audits by the Financial Supervisory Authority and ministries.
At the same time, the institutional framework will be strengthened to prevent moral hazards such as excessive order taking and financial mismanagement by shipbuilders.
Meanwhile, important medium-sized shipbuilders made profits in 2024.
Daehan Shipbuilding posted annual sales of Won1.1trn, up 32% year-on-year. Operating profit more than quadrupled from Won35.9bn to Won158.2bn.
Annual sales at K Shipbuilding (formerly STX Offshore & Shipbuilding) in 2024 were Won934.7bn and operating profit was Won11.2bn, up 32% and a turnaround respectively from 2023.
In 2024, HJ Shipbuilding & Construction generated annual sales of Won824.5bn from shipbuilding, an increase of more than Won100bn from the previous year. Its annual operating profit from shipbuilding was Won29.1bn.
